Initial Coin Offerings (ICOs)

Initial Coin Offerings (ICOs)

Initial coin offerings (ICOs) are a form of cross-border funding mechanism for early-stage cryptocurrency projects. ICOs often promise to use blockchain technology to offer a decentralized version of an existing service or product. A standard ICO consists of a whitepaper that describes the blockchain-based product or service on offer, the development team's and ICO advisors' backgrounds, the product roadmap, and the distribution of ICO funds.

In general, initial coin offerings (ICOs) collect funds by selling digital tokens on decentralized platforms like Ethereum. The tokens are then exchanged for cryptocurrencies and distributed to the general public. Some ICOs have a pre-sale duration where (accredited) investors can get a discount on the ICO price.

Within months of the ICO, digital tokens are typically listed on cryptocurrency exchanges, providing instant liquidity to early investors.

Each ICO is overseen by a group of developers and entrepreneurs, and it is often conducted through a legal entity based in a crypto-friendly jurisdiction. Switzerland and Singapore are two common destinations. The funds raised by the ICO would be used to finance the related goods and services' research, production, and marketing.

As performance-based rewards, the team will keep a portion of the digital tokens. These tokens could have a vesting cycle to better align the needs of blockchain developers and long-term investors.

The ICO market

Person and institutional investors alike have been drawn to the worldwide boom of initial coin offerings (ICOs).

ICO operation has slowed in recent months, but the earlier flood attracted enough money and human resources to finance a variety of promising projects for the foreseeable future.

Digital infrastructure, banking, trading, messaging, and payment solutions were the top five crypto categories in 2017. This was the source of 64% of the overall funds collected. Since blockchain is still in its early stages of development and will require major changes before it is ready for widespread adoption, the emphasis on infrastructure makes sense. As a result, ICO-funded projects compete against one another to deliver these minor advancements in blockchain technology, solidify its use cases, and capture value.

Many ICO-funded projects would crash, as is common with early-stage innovations. Those who succeed in achieving their objectives, on the other hand, have the ability to change industries and even develop new ones.

Is There a Business Case for Utility Tokens?

Utility token offers make up the vast majority of ICOs. In most cases, ICO investors send cryptocurrencies to a smart contract, which then sends the tokens back to the original address. Investors of utility tokens are not entitled to explicit cash flows. They also don't represent stock of real businesses. They aren't considered debt or any other type of financial instrument with a predictable return.

 The value of a utility token is determined by the demand for the service or product that it represents. Utility tokens are similar to taxi medallions, airline miles, or Starbucks points in this regard, except that they "exist" on a decentralized network, have a limited supply, and can be traded globally.

And it's there that they'll find their investment opportunities and risks.

If a digital token is good, the value it produces is directly transferred from the buyer to the digital tokens' holder. Utility tokens, unlike traditional businesses with recurring operating costs, have no significant costs.

Reframing utility tokens as investors' gain in future sales is a good way to think of them.

Tokens of utility should be considered as early-stage investments: All of the risks — research, growth, and implementation — are assumed by investors up front. Utility token holders, on the other hand, have instant liquidity, unlike venture capital investors. Utility tokens may have a major upside for early investors, depending on the entry price, timing, and addressable market size.

Dangers

Of course, as a new and unregulated asset class, ICOs carry significant technical, legal, and business risks. The absence of high-quality analysis is a major disadvantage, rendering the room more vulnerable to manipulation than conventional financial markets.

Technical danger - Anyone with basic coding skills can generate a utility token in 15 to 30 minutes on Ethereum. This helps to understand why there are so many dubious offers in the ICO space. To make an informed decision on an ICO, an interdisciplinary analysis of the arguments made by the ICO team is needed, as well as a working knowledge of computer programming, game theory, and cryptography.

Legal danger - Investors of initial coin offerings (ICOs) do not have the same rights as those in controlled public financial markets. There are no legally binding agreements governing ICOs. In extreme situations, ICO gifts are listed as donations, effectively barring investors from taking legal action against those who raised the funds.

Lack of quality research - Many websites "rank" ICOs on a variety of criteria, but they are frequently paying ICO promoters. Utility tokens, unlike conventional asset classes that have developed structures for determining their fair value, require new valuation frameworks. This further complicates their upside potential.

Business danger - ICOs are used to finance early-stage businesses with a lot of "hidden unknowns." ICOs raise a significant amount of money in the first round, unlike early-stage start-ups that go through multiple rounds of milestone-based funding. This may or may not be sufficient to meet the planning goals set out in their roadmaps. Teams may decide to abandon the project in the middle or make changes to the schedule. There's also the possibility of adoption. Despite the developers' best efforts, the product could simply fail.

Conclusion

Using blockchain-based trust to enable transactions, monitor properties, and process and store data has inherent value. Utility tokens backed by an ICO will help unlock and capture the value.

Utility tokens, on the other hand, are unusual as investment instruments. They reflect access to goods and services, similar to frequent flyer miles, and their pricing is based on market performance.

A new, multidimensional research paradigm is needed to determine their fair value. Utility tokens may have an investment case, but they often come with serious and difficult-to-avoid risks.

As a result, investors need dependable, impartial analysis to consider both the upside and downside of an ICO.